Outside the Beltway

Discount iPods

James Joyner · Saturday, December 23, 2006 · 4 comments

Sean Cooper explains why you can’t get iPods at a discount in an economy where almost all high tech goods are available at a wide range of prices.

If price variation is the natural state of the Internet, then how come the 8GB iPod nano, for example, always sells for $250 (give or take a few cents)? No, the answer isn’t that Apple illegally manages prices. In reality, Steve Jobs and Co. use an accepted, if controversial, tactic, a retail strategy called minimum advertised price, to discourage resellers from discounting.

The minimum advertised price, or MAP, is the absolute lowest price retailers are allowed to advertise a product for. (If you’ve ever shopped at a site that won’t reveal a product’s price until you add it to your shopping cart, MAP is the reason.) MAP is usually enforced through marketing subsidies offered by a manufacturer to its resellers. If a retailer keeps prices at or above the minimum advertised price, then a manufacturer like Apple will give them money to help advertise. If a store’s price dips too low, on the other hand, the manufacturer can withdraw these advertising subsidies.

MAP helps smaller retailers compete, since it aids in reducing the kind of cutthroat price competition from big-box stores that can put them out of business. But what’s in it for a company like Apple? Stable prices are important to the company, because it’s a manufacturer and a retailer (both online and through its chain of Apple Stores). If Apple resellers dropped prices on iPods and iMacs—selling at or below cost to get customers in the door, or as a way to cross-sell stuff like software or iPod skins—they could squeeze the Apple Stores out of their own markets.

There is a downside to all that stability, however. By limiting how low sellers can go, MAP keeps prices artificially high (or at least higher than they might otherwise be with unfettered price competition). In 2000, the Federal Trade Commission forced the five major record labels to suspend MAP policies that it deemed excessively restrictive. MAP benefits manufacturers and, to a lesser extent, retailers, but not necessarily consumers.

Now, to me, this sounds an awful lot like price fixing. On the other hand, there are plenty of portable MP3 players out there available at much better prices. If people want the allure of iPod and their proprietary song downloading system, then there’s no reason Apple shouldn’t be allowed to dictate the price.